Dollar turns back up as stocks head lower

Bernanke’s speech Friday still the main event of the week

WilliamL. Watts

DeborahLevine

An earlier version of this story gave the wrong day of the week prices for the euro and Japanese yen were being compared to. The story has been corrected.

NEW YORK (MarketWatch) — The U.S. dollar turned back up on Thursday after U.S. stocks gave up early gains and turned sharply lower.

The currency market tends to move in fairly close relation to stocks lately, as currency traders look for hints about investors’ appetite to take risks, equating buying stocks with moving into riskier currencies than the dollar and Japanese yen.

Most major currency pairs remained in tight ranges as investors focused on an eagerly awaited speech on Friday by U.S. Federal Reserve Chairman Ben Bernanke.

The dollar index
DXY, -0.22%
which measures the greenback against a basket of six major rivals, rose to 74.262, after spending some part of the session in negative territory and versus 73.794 in North American trade late Wednesday.

The euro
EURUSD, +0.3092%
turned positive then slipped back to $1.4379, compared with $1.4422 on Wednesday. It had risen as high as $1.4475 earlier.

The dollar rose to 77.57 Japanese yen
USDJPY, -0.11%
compared to ¥77.01 late Wednesday.

The dollar got a lift after the Labor Department said 417,000 Americans filed first-time claims for jobless benefits in the latest week, more than many economists expected. Officials noted the numbers were distorted by a labor dispute at Verizon Communications that added to applications. Read story on jobless claims.

“Some encouragement can be taken from the fact that the undistorted number of claimants is only 410,000, close to the 4-week moving average of 408,000,” said Millan Mulraine, economic strategist at TD Securities. “Moreover, it is an indication that businesses have not necessarily stepped up their pace of firings, though they have also been less reluctant to hire, in the face of the heightened global economic and financial market uncertainties.”

After the data, U.S equity futures erased most of their gains, pointing to a flat opening on Wall Street. Warren Buffett’s big investment in Bank of America Corp.
BAC, -0.51%
boosted stocks briefly. In recent action, the Standard & Poor’s 500 Index lost 1%. See more on U.S. stocks.

Waiting for Bernanke

But investors are largely waiting to see if Bernanke indicates the Fed is contemplating a third round of quantitative easing, or QE3, or other measures to stimulate the economy. Such a signal would likely be seen as dollar negative, strategists said.

“For the first time in what seems like months we have to say that the markets are a bit boring at the moment,” said Steve Barrow, currency and fixed-income strategist at Standard Bank in London. “It seems clear that markets are just idling, waiting for Bernanke’s speech on Friday, with volumes looking pretty low.”

Bernanke is scheduled to address an annual symposium on central banking in Jackson Hole, Wyo., on Friday.

Failure to signal another round of quantitative easing would likely spur a renewed round of risk aversion, said Markos Solomou, risk manager at Easy-Forex, in emailed comments. That could lead to a drop in equity markets and a strengthening of the dollar on safe-haven flows.

If Bernanke does signal QE3, the dollar is likely to fall, with gold bouncing back to possibly break the $2,000 an ounce level in the near term, while commodities would also likely rise, Solomou said.

But Barrow questioned whether the Fed’s market-moving ability is as strong as generally perceived.

“Given the ineffectiveness of monetary policy right now, with rates stuck close to zero, Bernanke probably has a lot less power to move the markets over the long haul than we might think,” Barrow said. “Of course, it might not look like that on Friday afternoon as his comments could cause some sharp initial reactions.”

The anticipation for Bernanke also overshadowed simmering worries about Europe’s banking system and the ability of countries which have already received bailouts to finance themselves. The yield on Greek 2-year notes topped 43% during the session, up from an already sky-high 20% not that long ago.

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